The scale of production has important bearing on the cost of the production. It is manufactures common experience that larger the scale of production, the lower generally the average cost of production. That is why the entrepreneur id tempted to average the scale of production so that he may benefit from the resulting economics of scale. These economics are broadly speaking of two types:
- Internal economics
- External economics
Internal economics are those economics in production, those reductions in production cost, which is accrue to the firm itself when it expands its output or enlarge it scale of production. The internal economics arise within a firm as a result of its own expansion independent of the size and expansion of the industry. The internal economics are simply due to the increase in the scale of the production. They arise from the use of methods which small firms don’t find it worthwhile to empty internal economics may be of the following types: large machine and he is a mechanical advantage in a use of large machine. Technical economics pertain not to the size of the firm but to a size of factory or establishment.
- Technical economics: They arise from the fact that it is easy to make the a large machine, and there is a mechanical advantage in a the use of large machines. technical economics pertain not to size of the firm but to a size of a factory or establishment `
- Managerial economics: Those economics arise from the certain of special departments. They also result from the delegation of routine and details matter to subordinates. The managerial expenses can be reduced by increasing the size of an establishment under one management.
- Commercial economics: They arise from the purchase of materials and scale of goods. Large businesses have bargaining advantages and are accorded a preferential treatment by the firms they deal with.
- Financial economics: These economics arise from the fact that a big firm has a better credit and can borrow on more favorable terms. Its share enjoys a wider market, which encourages a prospective investor.
- Risk- bearing economics: A big firm can spread risks and can often eliminate them. This it does by diversifying outputs.
External economics are those economics which accrue to each number firm as a result of the expansion of the industry as a whole.
Various types of the external economics are given below:
- Economic of concentration: These economic are relate to advantages arising from the availability of skilled workers, the provision o better transport an credit facilities, stimulation of improvement , benefits from subsidiaries and so on.
- Economics of information: These economics refer to the benefits which all firms engaged in an industry derived from the publication of trade and technical journals and from central research institution.
- Economics of disintegration: When an industry grows, it becomes possible to split up some of the processes which are taken over by specialist firms. For example, a number of con mills located in a particular locality may have the benefit of a separate calendaring plant.